DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS - Industry Overview and Opportunities For Fund Managers 3rd March 2020 ...
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DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS Industry Overview and Opportunities For Fund Managers 3rd March 2020
DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
DIGITAL ASSET INDEX PRODUCTS -
OFFERING EXPOSURE TO
INSTITUTIONAL CLIENTS
Index-linked, passive investment is set to dominate the 2020s. As an investment
vehicle, passive investment strategies overtook active ones in terms of assets
under management by the end of the last decade, reaching an all-time high of $4.2
trillion according to a recent Bloomberg report. There are two key drivers to this
phenomenon. The first is that these financial products provide low-cost access to
specific asset classes (e.g. S&P 500, gold and bitcoin trackers). The second is that
it is an open question as to whether active strategies justify the higher management
and performance fees on a risk-adjusted basis.
Digital assets as an investment vehicle are beginning to take on a broader scope.
While in the past, native cryptoassets like bitcoin and ether were the only game in
town, the future will see an increasing number of traditional assets represented in
this segment. Fiat currencies will be represented in digital form, while bonds,
equities and real estate assets are beginning to be tokenised as well.
These dynamics mean that digital asset index products are set to grow in popularity
as passive investing too.
Bitcoin Futures & ETFs
Both futures contracts and Exchange Traded Products (ETPs) that track the price of
digital assets are attractive investment products because investors can gain
exposure to the underlying assets without the barriers to entry associated with
digital assets, such as compliance, the complexity of custodying private keys and
trading the assets themselves.
CME and CBOE issued their Bitcoin futures contracts in late 2017 just before the
bitcoin price reached an all-time high at $19,000. Since then, a monthly total
Chart 1: Regulated Bitcoin Futures Volume CME CBOE
8,000,000
6,000,000
Volume (USD)
4,000,000
2,000,000
0
8
8
8
18
8
19
9
9
9
19
9
20
-1
-1
l-1
-1
-1
-1
l-1
-1
p-
n-
p-
n-
ar
ay
ov
ar
ay
ov
Ju
Ju
Se
Ja
Se
Ja
M
M
M
N
M
N
Source: CME, CBOE
MV Index Solutions & CryptoCompare 2
DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
nominal of $5m on average has been trading since 2019, with open interest
currently sitting at $250m. While the notionals seem small, growth is beginning to
pick up in a significant way, as shown in Chart 1.
Digital asset CME and CBOE futures contracts are cash-settled, meaning that
trading them amounts to a leveraged bet between two trading entities, marked
against an underlying reference price. In contrast, ETPs have an investment vehicle
associated with them that is managed by a portfolio manager responsible for
tracking the underlying asset’s performance, usually by holding the underlying asset
directly. Such products may be cheaper and operationally easier to use than futures
products, as investors don’t need to deal with daily margin accounts or having to roll
their positions into the next contract upon expiry.
Over the last three years, several fully fledged Bitcoin Exchange Traded Fund
proposals have been submitted to the Securities Exchange Commission (SEC)
without achieving regulated status (see Table 1). The regulators’ primary objection
is that a native digital assets do not yet have a sufficiently transparent and
regulated infrastructure particularly in the prevention of market manipulation and
other illicit activities that occur on some exchanges. Proving otherwise is
challenging, as digital assets are decentralised with much of the trading volume
flowing through unregulated secondary markets. That being said, exchanges with
institutional-grade governance and transparency have evolved in recent years.
Some of the proposed ETFs plan to hold regulated futures contracts and so adhere
to market surveillance requirements but such futures contracts rely on their
underlying reference rate methodology. However, this methodology is a calculation
that uses price data from a host of different venues - the components of which are
still deemed insufficiently robust in the eyes of the regulators.
Table 1: Bitcoin ETF proposals submitted to the SEC. Source: SEC
Company Filing Date Status Underlying Exchange Listing
Winklevoss 2013 Jul Rejected Physical BTC CME
VanEck 2017 Dec Withdrawn Futures BTC NASDAQ
ProShares 2017 Dec Withdrawn BTC Futures NYSE Arca
First Trust 2017 Dec Withdrawn BTC Futures CBOE
Direxion 2017 Dec Withdrawn BTC Futures NYSE Arca
REX 2017 Dec Withdrawn BTC Futures CBOE
GraniteShares 2017 Dec Withdrawn BTC Futures CBOE
VanEck SolidX 2018 Jun Withdrawn BTC OTC market CBOE
Bitwise 2018 Mar Rejected Physical BTC NYSE Arca
Kryptoin 2019 Oct Rejected Physical BTC NYSE Arca
Wilshire Phoenix 2019 Jan Rejected Physical BTC, US Treasuries NYSE Arca
MV Index Solutions & CryptoCompare 3DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
Opportunity
One should look into how regulated and unregulated bitcoin markets could co-exist,
and benchmark1 trading venues to create a robust selection methodology for
reference price calculation.
Case Study
MVIS & CryptoCompare have been working with 3iQ, a Canadian fund manager
that is planning to launch a regulated bitcoin fund on the Toronto Stock Exchange in
the Spring of 2020.
For creating a robust index calculation, MVIS & CryptoCompare worked with 3iQ to
carefully select exchange constituents, develop an index calculation methodology 2,
back test and stress test the index. Chart 2 shows the resulting index that
outperforms the CryptoCompare Aggregated Bitcoin Index3 .
"The teams at MVIS and CryptoCompare are great partners for creating a digital
asset index. They have the knowledge, data and responsiveness to build an index
reflecting the market we deal in for our bitcoin fund. We are proud to be apart of
the creation of the MVIS CryptoCompare Institutional Bitcoin Index." Shaun
Cumby, Chief Investment Officer, 3iQ Corp. [February 25, 2020]
Chart 2: MVIBTC Outperforming Bitcoin CCCAGG MVIBTC Premium
1,700 0.75
Premium on CCCAGG (Percent point)
1,560
0.438
Index Value
1,420
0.125
1,280
-0.188
1,140
1,000 -0.5
/1 19
9
9
/1 1 9
9
9
9
9
9
0
0
0
0
0
0
0
0
0
0
2/ 0
20
/1 01
/1 1
/1 01
/1 01
/1 01
/1 01
/0 01
/0 02
/0 02
/0 02
/0 02
/0 02
/0 02
/0 02
/0 02
/0 02
/0 02
/0 02
03 1/20
11 2/20
15 2/20
20
07 2/2
19 2/2
23 2/2
27 2/2
31 2/2
04 2/2
08 1/2
12 1/2
16 1/2
20 1/2
24 1/2
28 1/2
01 1/2
05 2/2
09 2/2
13 2/2
17 2/2
/1
29
Source: CryptoCompare
1 See https://www.cryptocompare.com/media/36569367/cryptocompare_exchange_benchmark_2019_11pdf.pdf?data
2 The MVIS CryptoCompare Institutional Bitcoin Index measures the performance of a digital assets portfolio which
invests in Bitcoin, prices from selected exchanges. See https://www.mvis-indices.com/indices/digital-assets/mvis-
cryptocompare-institutional-bitcoin
3CCCAGG refers to the real-time index calculation methodology, the purpose of which is to show the best price
estimation for crypto traders and investors to value their portfolio at any time. It aggregates transaction data of over
100+ exchanges, using 24 hour volume weighted average. See https://www.cryptocompare.com/media/12318004/
cccagg.pdf
MV Index Solutions & CryptoCompare 4DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
SIX Swiss Exchange - The Hotspot for
Digital Asset ETPs
While the SEC has been rejecting ETF filings, the SIX Swiss Exchange, supported
by clear regulation on in this regard, has meanwhile become a leader in the
domain.
According to the SIX Exchange’s definition, “ETPs are secured, bearer debt
securities that do not earn interest (bonds). These products are not subject to the
Collective Investment Schemes Act (CISA) and as such, are not supervised by
FINMA”. This means that ETPs are not equivalent to ETFs in the sense that they
are not funds and enable investors to invest in tracker products offered by
institutional asset managers.
Amun AG, one such institution, has launched multiple products in 2019 including
single asset and basket trackers (example: HODL). New York based asset manager
and ETF sponsor, Wisdom Tree, also launched their Bitcoin ETP on SIX (WBTC).
The two products are beginning to show good traction as shown on Chart 3.
Chart 3: SIX Exchange Digital Asset ETP Volumes Growing HODL WBTC
700,000
525,000
Volume (USD)
350,000
175,000
0
/0 19
/0 1 9
/0 19
/1 19
/1 19
/1 19
/1 19
/1 19
/1 19
/1 19
/1 19
/1 19
/1 19
/0 19
/0 20
/0 20
/0 20
20
11 /20
19 /20
27 /20
07 /20
15 /20
23 /20
31 /20
08 /20
18 /20
26 /20
04 /20
12 /20
20 /20
07 /20
15 /20
23 /20
31 /20
20
1/
9
9
9
9
0
0
0
0
1
1
1
2
2
2
1
1
1
/0
03
Source: SIX
Opportunity
The SIX Swiss Exchange has been open to innovative products like digital assets,
and it also has plans to open its own blockchain based exchange, the SIX Digital
Exchange.
MV Index Solutions & CryptoCompare 5DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
Case Study
MVIS & CryptoCompare helps funds materialise the index strategies the client
comes up with, such as taxonomy4 based portfolios or rule based portfolios. The
client is also advised on NAV, iNAV and POC calculations.
Digital Asset Products Have Unique
Challenges
Some of the distinct characteristics of digital assets make it harder to launch
financial products. De facto corporate events such as cryptocurrency hard forks, the
need for robust custody and key management services, and a volatile global, 24/7
market are all problems that are increasingly being solved.
Corporate Events Like Hard Forks Require a Robust Methodology
A fork is defined as an event that splits the existing blockchain protocol into two or
more versions using a different set of rules and features. Each version shares the
same history. For investors, this might result in a split of their shares, and can be
treated as a corporate action. However, claiming a forked asset can be risky and
result in loss of funds.
CryptoCompare’s Hard Fork Policy5 report serves as a useful tool for better
understanding what hard forks are, why they occur, and what the potential risks are
for the investor. It also provides a general outline of how forked coins are claimed,
as well as an overview of fork policies, requirements and support among various
cryptocurrency wallets and exchanges.
Custody and Key Management Services
For funds holding digital assets, the security and handling of their funds is of
paramount importance. Transactions on the blockchain require signing with a
private key, which effectively acts as a title on the asset. Keeping keys safe
therefore is a critical security risk. Furthermore, each digital asset might be based
on a unique blockchain that requires additional expertise.
Custodial services such as BitGo and Coinbase Custody handle the full
management of funds, with more and more regulated providers appearing on the
market targeting institutional clients.
4 See https://www.cryptocompare.com/media/34478555/cryptocompare-cryptoasset-taxonomy-report-2018.pdf
5 See https://www.cryptocompare.com/media/35651237/cryptocompare_fork_policy_2019_07.pdf
MV Index Solutions & CryptoCompare 6DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
Global exchange liquidity
Digital assets that are based on public blockchains are described as decentralized
because and it is not possible to limit their exchange and transaction to specific
venues. Bitcoin, for example, is traded on 100+ exchanges across the globe, as
well as on peer-to-peer venues. Measuring liquidity is therefore another challenge.
CryptoCompare’s Exchange Benchmark is used by investors and portfolio
managers to assess different trading venues to select the exchange that most suits
their risk profile.
The Benchmark seeks to bring clarity to the cryptoasset exchange sector by
providing a framework for assessing risk, bringing transparency and accountability
to a complex and rapidly evolving market. This is approached in several dimensions
using a comprehensive data set, covering 160 exchanges across 8 categories of
evaluation:
• Legal/Regulation
• Data Provision
• Security
• Team/Exchange
• Investment
• Trade Monitoring
• Market Quality
• Negative Events Penalty
Conclusion
As the demand for digital asset index tracking funds heightens, fund managers
should explore the opportunities this new asset class brings. Although ETF
proposals haven't been successful yet, ETPs on SIX Swiss Exchange have been
thriving and many more products will be launched this year. Such products can only
be built on robust methodologies and services, an arena in which CryptoCompare
and MVIS will continue to lead the way.
MV Index Solutions & CryptoCompare 7DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
Contact
Quynh Tran-Thanh
Chief Product Officer
CryptoCompare
qtran@cryptocompare.com
Thomas Kettner
Managing Director
MV Index Solutions
thomas.kettner@mvis-indices.com
MV Index Solutions & CryptoCompare 8DIGITAL ASSET INDEX PRODUCTS - OFFERING EXPOSURE TO INSTITUTIONAL CLIENTS
Disclaimer
Nothing in the commentary shall be considered a solicitation to buy or an offer to sell a security, or any other product or
service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of
such jurisdiction. Please note that it is not possible to invest directly into an index.
Neither MV Index Solutions GmbH (the “Company”) nor any of its licensors makes any warranties or representations, express
or implied, to the user with respect of any of the data contained herein. The data is provided for informational purposes only,
and the Company shall not be responsible or liable for the accuracy, usefulness or availability of any information transmitted or
made available through it.
The MVIS® indices are protected through various intellectual property rights and unfair competition and misappropriation laws.
In particular, Van Eck Associates Corporation has registered the ‘MVIS’ trademark. You require a license to launch any product
whose performance is linked to the value of a particular MVIS® index and for all use of the MVIS® name or name of the MVIS®
index in the marketing of the product.
All information shown prior to the index launch date is simulated performance data created from backtesting ("Simulated past
performance”). Simulated past performance is not actual but hypothetical performance based on the same or fundamentally
the same methodology that was in effect when the index was launched. Simulated past performance may materially differ from
the actual performance. Actual or simulated past performance is no guarantee for future results.
Investments into crypto currencies and/or digital assets are subject to material and high risk including the risk of total loss. The
calculated prices may not be achieved by investors as the calculated price is based on prices from different trading platforms.
Furthermore, an investment into crypto currencies and/or digital assets may become illiquid depending on the trading platform
or investment product used for the specific investment. Investors should carefully review all risk factors disclosed by the
relevant trading platform or in the product documents of relevant investment products.
© MVIS 2020.
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